With SFTR just around the corner and President Macron’s suspected revision of the FTT, what does the future look like for France’s securities lending?
In the midst of the Securities Financing Transactions Regulation (SFTR) implementation date in 2019, Macron’s revision of the Financial Transaction Tax (FTT), and the challenges Brexit could bring for the Capital Markets Union (CMU), it would seem like a challenging time for France’s financial industry, and indeed it’s securities lending infrastructure.
In Q1 2018, BNP Paribas securities services’s revenue reached €505 million, an increase of 5.7 percent compared to Q1 last year and the number of transactions rose by 5.1 percent compared to the same quarter the previous year.
In addition, (as of 11 May 2018) EquiLend reported on the whole, France’s average daily on loan balance thus far for 2018 stands at an impressive $130.70 billion per day, while average daily lendable balance thus far for this year is $733.8 billion.
Furthermore, average utilisation for the French market has been close to 18 percent so far in 2018—from 15.2 percent in early January up to 23.4 percent in May.
But despite the growth, there are concerns elsewhere. Fresh fear is lurking in the global financial markets, according to Tom Elliott, international investment strategist at deVere Group.
He cites Syrian chemical weapons installations causing growing tensions between France, the US, UK, and Russia as just
one reason.
In addition, back in March last year, when Clearstream warned the industry that Brexit posed a threat to the harmonisation effect of the CMU, nerves seemed frayed.
Though, looking more towards the future, Paris could in fact inadvertently benefit from Brexit—capitalising headquarters in Paris, with The European Securities and Markets Authority (ESMA) already having its headquarters there. But how likely is this to actually happen? Will Paris take over from London as the world’s central financial hub?
SFTR: The big issue
Under the European Markets and Infrastructure Regulation (EMIR) rules, over-the-counter derivatives required more collateral, and therefore were usually more expensive. Many thought this could lead to derivatives businesses borrowing additional securities to cover the new costs, could this also happen under the framework
of SFTR?
Historically, while the regulatory landscape has been volatile across Europe and has probably affected all financial services markets, it can be difficult to judge the knock-on effect that individual changes will have, particularly in France.
SFTR is at “a very pivotal point”, according to Andy Dyson, CEO of the International Securities Lending Association (ISLA), in a video message released on the association’s website last month.
Dyson said: “We are currently waiting for the [European] Commission to start the formal adoption of the technical standards that were published by ESMA in March 2017.”
The FTT? We’ll have to see...
The French president Emmanuel Macron wants to put the FTT back on the European agenda. FTT requires taxes to be collected for regular cash market transactions in France and Italy and is charged only on the specific transactions that are designated as taxable.
Given that most clearing firms and instant payment systems transact, on average, thousands of transactions a day, securities lending could be affected.
This is because in January this year, the rate of interest increased from 0.2 percent interest to the rate of 0.3 percent.
Recently, a panellist at the Association of the Luxembourg Fund Industry European Asset Management Conference said: “The FTT issue needs to be resolved.” But will this harmonisation be possible in the midst of Brexit?
La grande question of ESMA and Brexit
Strained political relations in the EU has put the harmonisation efforts of Europe’s financial markets under “severe stress”, according to a statement from Clearstream released in March, last year.
In a note to clients, the Deutsche Börse subsidiary said: “Against the current political backdrop, it is key for policy makers and stakeholders to focus on the execution of capital markets union objectives.”
However, Northern Trust’s Clive Bellows, head of global fund services for Europe, the Middle East and Africa, seems adamant that location wise, nothing much will change.
He says: “Northern Trust has an established network of offices across the UK, Ireland and continental Europe and remains well placed to continue to service our clients regardless of the outcome of the Brexit negotiations.”
He adds: “Our London office remains our regional headquarters for our business in Europe, Middle East and Africa.”
A report from professional services firm PwC, stated disruptions to the level of market access in financial services as a result of Brexit will leave “no winners”.
PwC’s report, which focuses on the impact of the loss of mutual market access in financial services across the EU27 and the UK, projected that disruptions would be “economically costly”.
For remaining EU members, like France, the economic impact “incorporates both gains and losses”, according to the report.
The report showed while Frankfurt has emerged as the likely recipient of the largest amount of relocated activity, a number of other cities have also been selected, including Paris.
